246wb -managing risks in financing agriculture - renate kloeppinger-todd

7/31/2019 246WB -Managing Risks in Financing Agriculture - Renate Kloeppinger-Todd

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Managing Risks in FinancingAgriculture

Renate Kloeppinger

Rural Finance Adviser

The World Bank

AFRACA Agribanks Forum

4-7 May 2010, Abuja, Nigeria


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Presentation Outline

Background

Findings from a Conference

Findings from a Study

Conclusions


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Background

Agriculture Credit - The history of failedinterventions

Agriculture Credit Overview of recent approaches

World Banks work in Agriculture Risk Management

Food Crisis and the renewed interest in FinancingAgriculture

Studies, Conferences, and New Interventions


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Agriculture Credit and a History of FailedInterventions in the 80s and 90s and littleactivity in most of the 2000s Emphasis on Agriculture Development Banks and

large credit lines = low repayments, elite capture, politicalinfluence on credit decisions

Subsidized interest rates or interest rate caps = banksare unable to recover their costs; if there is reimbursementfrom the government most often limited funding leads tocredit rationing and again to elite capture

Loan forgiveness programs = bad credit culture

Savings completely neglected = farmers are unable tobuild up reserves for own risk management purposes

One off actions - sustainable access to credit for farmers

not a topic Guarantee programs for banks are expensive and often

lead to moral hazard and cherry-picking


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Recent approaches to agriculturefinance

Focus on private commercial financial institutions Emphasis on institutional development and capacity

building of financial institutions

Sustainable access to financial services, not only credit

Managing riskin financing agriculture is in the forefront

Focus on smallholder farmers (or their organizations)rather than large farmers only

Financing (along) the value chain receives attention

Insurance is a hot topic

Partial risk guarantee schemes are increasingly set up

Use of smart subsidies


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Expert Meeting on Managing Risk inFinancing Agriculture, April 2009,

Johannesburg

14 Findings

Financing for Agriculture is viable if supportedby sound risk management at multiplelevels

Good banking practices combined withunderstanding of the sector and the clientis a core requirement

Insurance is one tool in an overall riskmanagement strategy


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Expert Meeting on Managing Risk inFinancing Agriculture, April 2009,

Johannesburg

14 Findings Mutually beneficial partnerships through which

risk and benefits are shared lower risk

Aggregation of clients reduce risk andtransaction costs

Innovative forms of collateral and collateralsubstitutes provide added security to lenders

Financial literacy education is equally importantfor staff and clients of financial institutions


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The Study on Credit RiskAssessment and Management The

Questions Agricultural Credit Risk Assessment How is a credit request assessed?

How important is agricultural domain knowledge?

Is credit-risk quantified at the loan-level and at theportfolio level?

Agricultural Credit Risk Management How common is the use of collateral substitutes?

Do lenders facilitate access to risk mitigation

services for borrowers? What mechanisms are used?


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The Study Sample and Method

Sample:

17 institutions in 7 countries Focus on Africa and Asia

Cover major institutional types - Commercial banks(12), DFIs, and microfinance organizations.

Method: Rapid assessment of 15 institutions

Detailed assessment of 2 institutions


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The Institutions Studied

Malawi: OIBM, MRFC

Zambia: Stanbic, Barclays, Dunavant,Cropserve

Kenya: KCB, Equity, Coop Bank, AFC India: ICICI, HDFC, SBI, Basix

Thailand: BAAC

Armenia: ACBA-Credit Agricole

Kyrgyz Republic: Ayl Bank


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Study Findings - Credit RiskAssessment

Small Loans Approach 1: Parametric (rules of thumb, experience-

based)

Approach 2: Parametric + outsourcing

Large loans traditional financial ratio analysis.

3 banks use credit bureau only for largefarmers

1 bank uses bio-metric identification

5 banks use credit grading; only 1 uses riskmodeling


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Study Findings Credit RiskManagement

All banks lending to small farmers use collateralsubstitutes

Diversified loan portfolios agricultural loanportfolios 10 to 40 %

Only 1 bank bundles crop insurance; 1 bundlescredit-life insurance.

6 banks report risk-based pricing for largeloans; none for small.

3 DFIs report risk-based pricing for small loans


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Innovations

Use of biometric tools to uniquely identifyborrowers.

Parametric credit risk assessment and partial

outsourcing of this process

Tripartite lending arrangements producebuyer, lender and borrower.

Provision of fee-based agricultural and businessadvisory services.


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Some Conclusions

Lending to small farmers at scale requires non-traditional credit assessment systems

Lending to small farmers requires use of collateralsubstitutes, but not other elements of microfinance.

Multi-level diversification is key to credit riskmanagement at the portfolio level

Successful agricultural lenders have domain

expertise in agriculture at multiple levels

246wb -managing risks in financing agriculture - renate kloeppinger-todd

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